Savers to Get Punished for Saving? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Savers to Get Punished for Saving? 

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In this issue:
» Was BYD a bad stock choice for Buffett?
» SEBI chief UK Sinha now under Supreme Court scanner
» Should all natural resources be auctioned?
» India's deficit targets gone awry again!
» ...and more!

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00:00  Chart of the day
The habit of saving enough redeemed Asian economies from being a victim of the global credit crisis in 2008. Chinese and Indian households are envied by the West not just because of demographic advantages. But also because of our inclination to consume with minimal debt. Putting aside nearly a third of GDP for future consumption is a commendable virtue. Especially given the fact that global GDP growth rates seem to be off their peaks. However, if one looks at the West, this notion about savings could be easily dumped.

Americans learnt a rather late lesson in savings in the aftermath of subprime crisis. Until then, every American household consumed as if there was no tomorrow. Moreover, most of the consumption was on borrowed money. However, as young Americans gear up to put aside some earnings, they would be better off putting money under the carpet! Or rather consume more than their ancestors ever did to stimulate GDP growth rates. For interest rates in the US are destined to stay near zero for at least another two to three years. Meanwhile, if the Fed has its way trillions more will get pumped into the economy by way of QEs. In such a scenario it is rather unlikely that real interest rates will fetch positive returns for savers. Especially if they stick to fixed income papers.

For savers in India though, the situation is not as gloomy yet. With the Reserve Bank of India (RBI) not willing to budge on its inflation stance, real interest rates may remain positive if not high. However, one cannot say that relying on the same could afford savers and retirees a decent living. As and when cheap money from the West trickles down, it could further pressurize real interest rates. Plus we have the government breathing down RBI's neck to lower interest rates!

In such a scenario, investors looking to park money for long term have to keep the risk reward tradeoff in mind. Investing in safe stocks and gold seem to be the best bets to fetch adequate inflation adjusted returns. And even if interest rates head lower, there could be some stocks that could profit from the trend. Hence saving well can never go out of fashion. Provided you know where the smart money is going.

Data source: World Bank

We live in a country where the government has come under the scanner for numerous scams. Nearly every politician who we entrusted with ruling our beloved country has been tainted for something or the other. As citizens we have been forced to hang our heads in shame. But beyond the shame comes the sense of increased risk. And now as investors we have reason to be even more wary. For now the Chairman of Securities and Exchange Board of India (SEBI), the regulator of financial markets has come under the scanner.

The Supreme Court of India has asked the government and SEBI to respond to a plea alleging irregularities in the Chairman's appointment. As per the plea Mr UK Sinha was not eligible for the post as Chairman of SEBI. His appointment was allegedly manipulated by the finance minister's secretary to suit her own interests. The reason why his appointment has been questioned relates to his past. Prior to his current role, Mr Sinha headed the UTI AMC. There his personal emoluments amounted to Rs 40 m. In a Public Sector Enterprise, such kind of remuneration is not possible. The plea has also alleged that he himself decided to raise his rewards while working for the company. He has been accused of bending the rules by appointing his own Board of Directors to pass rulings in his own favor. Such a person is allegedly not qualified to head any institution least of all a regulatory body of the likes of SEBI. If the allegations are proved right, this would bring to light yet another scam. We wonder if there is any regulatory or governing body in the country that is ethical enough! The worst part is that the answer to this is probably not!

Do you think the appointment of the chief of regulatory bodies must be more transparent? Do share your comments with us or post your views on our Facebook page / Google+ page

Remember BYD? Well, for the uninitiated, BYD is a Chinese and electric car maker that caught the fancy of Warren Buffett few years back. In fact, so impressed was Buffett's partner Charlie Munger with the firm that he immediately dispatched the CEO of one of Berkshire Hathaway group companies to China to get a firsthand look of the company. The process culminated in the purchase of close to 10% stake in BYD by Berkshire Hathaway. Today, nearly four years on, the deal doesn't look as smart as it was made out to be. The share price of BYD took a beating on the Hong Kong stock exchange after the release of a critical report by a prominent brokerage house. Clearly, bad news for a firm that has already lost close to half its market value since hitting a 52-week high in February. And the future doesn't look encouraging either what with the fundamentals likely to deteriorate further.

To be honest though, Buffett's stake isn't in grave danger just yet. His stake is still worth US$ 416 m, nearly twice of the amount that he had plonked into the firm. However, given the uncertainty surrounding BYD, even he would be unwilling to commit any more capital we believe. May be he would pay the price of going against his own rule of not investing in high-tech companies. Let us not read too much into this though. After all even he is human and we should certainly allow him his fair share of gaffes.

It is believed that the fear of rating downgrade was the main reason behind the recent spate of reforms. India was on the radar of many agencies for its inability to control the widening fiscal gap. While some had already downgraded India some were on the verge of it. However, Moody's has retained its faith in India's sovereign rating. It assigns a stable rating to India saying that the slowdown concerns are temporary.

But what does it mean for India? The country might attract more capital from foreign investors as visibility improves. However, we attach little importance to the rating rationale of such agencies. That's because of their inability to stay ahead of the curve. Remember, these very agencies accorded AAA status to the junk subprime bonds of US. Also, we are not too convinced about their rating standards. We all know what happened to the S&P chief once he downgraded US. Perhaps, a more transparent rating mechanism is required to re-ignite one's faith in these agencies.

A country endowed with a wealth of natural resources is likely to be plundered if the laws governing them are weak. And more so in the case of a lame duck government! That's exactly the story of India. As such, it is not at all a surprise that the country has been mired in various mining scams. The latest coal blocks allocation scam has created a huge uproar and put the Prime Minister in a tight spot.

If you may recall, in February 2012, the Supreme Court had ordered the cancellation of 122 2G licenses. It had affirmed that natural resources should be distributed through a public auction. Thereafter, the government moved a Presidential Referendum seeking the opinion of the apex court on whether auctioning of natural resources across all sectors is mandatory in line with its 2G spectrum judgement. Further, it also asked for clarity on which resources need to be auctioned and which ones can be allotted on a first-come-first-serve basis.

The Supreme Court is expected to deliver its verdict today. Whatever be the verdict, it will have long-term implications for how the country's natural resources are allotted by the government. How will this affect companies? If the court makes auctions mandatory, it will bring in transparency and fairness in the allocation process. We believe that it is high time the country's natural resources part ways with crony capitalism.

The Indian stock markets got a shot in the arm with the reform measures announced by the Government. However, as the latter announces its borrowing plans for next 6 months in the coming week, the markets may be in for a crude shock. This is because the Government has already overshot 51% of its borrowing limits in the first four months the current fiscal. With subsidies bill swelling up to 2.4% of GDP (versus 1.9% of GDP last year) and slower tax income, the Government is likely to borrow more than planned. Also, as general elections approaching in 2014, it is unlikely that the Government will cut down on expenses. Missing targets has been a norm for the Government. Last year, we ended up with a fiscal deficit of 5.7% of GDP versus a target of 4.1%. Chances are we will exceed fiscal deficit target once again. The fiscal slippage may lead to a weaker rupee and will pose a threat to the credit ratings. While the Government has taken some steps to limit the damage, it needs to do a lot more to bring the economy back on track.

After starting off in the positive, profit booking in energy and engineering stocks led the indices in Indian equity markets into the negative territory post noon. In fact the Indian markets are the sole losers in Asia currently. The BSE Sensex was trading lower by around 18 points at the time of writing. Most other Asian indices closed higher today while Europe also opened on a positive note.

04:50  Today's investment mantra
"As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results." - Warren Buffett

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    6 Responses to "Savers to Get Punished for Saving?"


    Sep 28, 2012

    I agree with you. The appointment to regulatory bodies must be transparent. The governing standards have become so loose that such happenings are now normal. Any where you look either a Babu or a politician is filling his coffers by looting the nation wherever he can by fair or foul means.

    All such cases should be dealt with severity and punishment awarded in shortest possible time.


    B K Nandi

    Sep 27, 2012

    If the report is true that UK Sinha's emoluments amounted to Rs 40 m, it is atrocious. In simple English language they including PM, Sonia Gandhi, Pranab Mukherjee are gang of looters. It is known fact that the Indian stock exchanges are manipulated, cream is extracted by the politicians, major owner and at last when nothing is there it comes to ordinary public. Ordinary public depends ob SEBI regulators but the appointment of chairman himself is questionable and hence he may be a party of manipulating the stock market. Still people are investing as they have no where to go. If PM is a true reformer let him allow Indian people to invest in other stock market like USA, UK etc. I think these scam leaders whoever he is must be given rigorous jail term or be hanged. Other wise these wild dogs will eat everything

    Like (1)


    Sep 27, 2012

    Dont we have trust worthy people at all?

    Like (1)

    Parimal Shah

    Sep 27, 2012

    Parody of chakravuh song
    UPA ho ya NCP, NDA ho ya BSP, SP or MP;
    Sabne apne scams mein des ko hai kaata
    Are humre hi khoon-pasine se
    inka Party chale dhakadhak

    Like (1)

    Umesh Sharma

    Sep 27, 2012

    It is really surprising that the west offers no incentive for saving and this may be the reason why the economy is not prospering.It is great to think of enjoyment on borrowed funds.But the crunch has to come some time or the other.Being a borrower puts you at the mercy of the lender a lesson well learned by Indians by virtue of stiff conditions imposed by IMF in the past.The savings can be encouraged only if the interest offered is attractive enough to at least nullify erosion caused by inflation.That is why it is surprising the Indian Banks are gradually lowering the interest rates even though the inflation in still not abated.Perhaps there is some political arm twisting in view of the coming elections.But the golden rule is not to spend all that you earn and keep something for the rainy day

    Like (1)


    Sep 27, 2012

    If UK Sinha got appointed first head of UTI Mutual Fund and next as Chairman of SEBI because of being in the "good graces" of Omita Paul, the indispensable sidekick of Pranab Mukherjee it is indeed one more scandal to hound the UPA Government , made worse by the fact that Sinha packed the UTI Board with his cronies and got the Board to "approve" a pay package of Rs. 4 crores for himself, a sum not earned by ANYONE in Government service. And pray what was Sinha's performance in UTI ? He ran it to the ground ! What was once the king among mutual funds is today an also ran, overtaken by aggressive private sector rivals like HDFC, ICICI Prudential, Reliance, etc: have overtaken it a long while ago. Sinha did not even plan his succession - today even one year after Sinha left UTI, the latter remains topless ! In SEBI too, Sinha has not been free of controversy, the most notable being his inability to stand up to the Finance Ministry when it went after the courageous Member of SEBI, Abraham for his fearless rulings against corporates engaged in crooked dealings. If the proposed enquiry quashes Sinha's appointment as the Chairman of SEBI, it will serve to enhance the image of SEBI in the eyes of the public.

    Like (1)
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